Régine HOLLANDER (CREW, Université Panthéon-Assas): « Technology and Best Practices in Financial Markets : does High-Frequency trading Threaten the Basic Principles of Good Governance? ».
Information technology first appeared in financial markets as a tool to facilitate the matching and clearing of buy and sell orders. More recently, as computers gained in power and speed, they have been programmed for high-frequency trading. The latter accounts for more than half of trading volume in the United States (55% on Nasdaq). According to proponents and users (about 400 financial institutions, including specialized funds), by providing liquidity and taking advantage of market inefficiencies, it reduces transaction costs for investors and acts as a stabilizer. For critics that see it as dehumanizing securities’ trading, it only benefits those firms that can afford to invest in ultra-fast equipment and hire quants capable to design the algorhythms that trigger buy and sell orders.
On 6 May, 2010, at around 2:30 pm, the DJIA lost 1000 points (9.2%), then bounced back almost all the way in a few minutes. The specialists of the Securities and Exchange Commission were not able to pinpoint the reason for the dramatic downfall. High-frequency trading was named as one of the possible causes for the huge loss and the fast rebound. Whether this was or was not the case, that episode is an indicator of the opacity that such type of trading makes possible. In moments of crisis, human traders can switch strategies and suspend activities that threaten the stability of a system, while computers have no scruples executing the programs they have been wired for.
Hence, one can wonder to what extent high-frequency trading is in compliance with the basic principles of social responsibility and transparency inherent in good governance.
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